Is the British credit union model broken? Is a collaborative system the answer? ?

Mainstreaming Co-operation: An Alternative for the 21st Century?

3rd July 2012, Manchester

Paul A JONES,Reader in the Social Economy

Research Unit for Financial Inclusion

Community finance for LondonCommunity finance for London

• A RUFI research study 2010-11• Supported by DWP (Government) and funded

by Santander• Prompted by ending of Financial Inclusion

Growth Fund • To provide a platform for the development of

credit solutions and community finance.• Focus on scaling-up the credit union sector• Launched in House of Commons in July 2011

Approach and methodApproach and method• Collaborative and action-oriented inquiry• Leading credit unions in the capital; the DWP,

local government and social housing sector• Demand side research

– Quantitative consumer research data– Analysis and geo-spatial mapping of the Government index

of multiple deprivation

• Supply side research – Interviews with 15 credit unions, partners and stakeholders,

research workshops, financial analysis of annual returns

Demand for financial servicesDemand for financial services• Much of inner London is in the top decile of the index of multiple

deprivation

• Almost 25% of housing stock is social housing, rising to half in some boroughs in East London.

• Average household income for Londoners on low incomes, is £11 ,240 p.a. lower than the national average of £12,175.

• Ethnic minorities represent 57% of the low-income population.

• 57% of low-income Londoners are credit users.

• 61% of Londoners have no savings

• Three quarters (74%) of Londoners on low incomes would find it difficult or impossible to raise £200 – £300 in an emergency without borrowing

• Many low income Londoners not able to access credit – 39% no credit in last 5 years, rising to 45% in BME households

Credit unions in LondonCredit unions in London• 35 credit unions in Greater London• Serving 27 of London’s 33 boroughs• Strong social and community focus• Growing faster than in Britain generally• 2005 – 2009– Assets up 92% (national increase, 44%)– Loans up 70% (national increase, 36%)– Savings up 79% (national increase, 39%)

Modest penetrationModest penetration• In 2009, 60,000 credit union members

in London

• 1% of Greater London population

• Growing at 18% per annum

• Demand-side research revealed 0.75m individuals, (30% of low-income Londoners and 42% of social tenants), lacked access to credit

Financial Inclusion Growth FundFinancial Inclusion Growth Fund

• September 2006 and to March 2011, 11 credit union contractors in London have:– Granted over 44,000 loans to low-income borrowers,

78% of whom are women and over 80% social housing tenants

– Made loans to total value of over £19 million– Opened over 25,000 current or savings accounts for

Growth Fund borrowers– Maintained less than 10% DWP target delinquency

rate16 on loans in 87% of the participating credit unions

• GF credit unions grown most significantly – 80% increase in savings since 2005 – 2009 (non GF 43%)

Financial challengesFinancial challenges• Low income to average assets (10 GF cus)

– 50% negative net income

• High operating expenses– 9 exceed 10% expense to average asset ratio (four in excess of

15%)

– Endemic to serving segments of low income market

• Bad debt – GF credit unions 9%; non-GF 11.7%

• Loan to asset ratio – 57% GF and 56% others• Need to maximise savings – but linked to maximising loans

• Need to price realistically

• Dependency on external subsidy

Organisational challengesOrganisational challenges

• Leadership, governance and management

• Consistency in products and services

• Serving wider target market

• Developing information technology

• Developing effective partnerships

Rationalisation and strain Rationalisation and strain

• Focus on business efficiencies

• Expansion and merger– Current approach to increasing

efficiency and driving down costs

• Current credit union model under strain– Organisational and financial strain – Impact of new legislation and regulation

CollaborationCollaboration• Current model – atomistic and competitive

• Need for radical new approach

• WOCCU – greater collaboration, greater market share

• Fischer (2002, 2005)

• Need for cohesive, networked and integrated system– To drive scale, efficiency and performance

A cultural shift A cultural shift • A focus on commonality rather than

uniqueness and a radical increase in operational excellence (Grace 2010)

• Focus on shared back and front office services

• Dependent on trust and commitment

Harnessing technologyHarnessing technology

• The electronic hub – or the back office

• Promoted by ABCUL

• Collaboration on back office functions

• Facilitate new products and services

• Enable link with the Post Office and other partners

Government supportGovernment support

• Coalition Government – success of the Growth Fund

• Modernisation and Expansion Fund (£73 million announced )

• Looking for step change in organisational capacity

• Dependent on Experian feasibility study

DWP Credit Union Expansion Project

Experian feasibility study report

• credit unions only option to serve low-income communities

• potential consumer market of at least 7 million working age adults

• movement has expanded– but costs are high,

– some of their processes and their systems are not currently fit for your purpose,

– and a major programme of cultural and behavioural change required to achieve modernisation and expansion

• 80% of the 95 credit unions consulted said they recognised the need for fundamental change

DWP Credit Union Expansion Project

• £38 million committed yesterday • credit unions that have demonstrated

progress, to participate in a programme of behavioural, process and systems change.

• Aim to double membership in 7 years• Issue not one of demand but capacity• Focus on sustainability, efficiency and costs• Increase of interest rate cap to 3% pcm

The future is collaborativeThe future is collaborative• Current business model broken

• Collaboration – a radical change

• Not easy - a major opportunity – Linked to new legislation and regulation

• Climate is right – increasing interest in the co-operative and mutual sector– Government, local government, social

housing providers and general public